RUTH SUNDERLAND: Shame of Libor scandal is laid bare

Bob Diamond’s ears must be burning. The former Barclays boss and his chairman Marcus Agius claim they did not quite grasp the warnings issued by the FSA about Diamond’s gung-ho leadership.

Unsparing verdict: FSA boss Martin Wheatley

But the pair could not fail to comprehend Martin Wheatley’s plain indictment of the shameless greed and complacency that spawned the Libor scandal.

Wheatley, the senior FSA man whose mission is to cleanse the ‘toxic brand of Libor’, has dissected the interest-rate rigging scandal that led to Diamond’s exit, and delivered an unsparing verdict.

The Libor debacle tore apart the very fabric of the financial system. The benchmark rate lies at the heart of $300trillion of transactions, so undermining its credibility is to aim a torpedo at the integrity of the banking system around the globe.

In comparison, even the disgrace of PPI mis-selling or the NatWest computer breakdown are mere bagatelles.

Wheatley diagnoses a wholesale failure of governance by the British Bankers’ Association – a trade lobby group whose own brand is so badly poisoned by the affair it is hard to conceive of an antidote.

The BBA committees supposedly overseeing Libor took such a ‘careless approach’ they hardly ever even bothered to meet.
Presumably when they did get together for a chinwag, they did not bother to look too closely into the questions openly being raised about the credibility of Libor submissions in the media at the height of the crisis.

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As for the banks themselves, they made virtually no effort to make sure that their submissions were genuine.
Far from it, they exploited the utter lack of oversight to paint themselves as being in better financial health than they actually were, while below the salt the traders did the same because they wanted bigger bonuses.

Libor was not a carefully regulated benchmark with the proper checks and balances, it was a free for all.
Wheatley wants stiff penalties for Libor abusers, including prison terms and large fines, with the abysmal BBA to be stripped of its governance role.

He also proposes welcome improvements to the system of Libor submissions, including an audit and clarification whether they are based on actual transactions or are purely notional.

The system and the individuals participating in it are to be brought under FSA control.
All sensible stuff, but it still leaves two uncomfortable questions.

First, why did the FSA fail to realise earlier that it is untenable to leave Libor unregulated, and do something about it sooner – and why, for that matter, did the Bank of England fail to pursue concerns?

Second, given its past record, can the FSA really guarantee Libor is safe in its hands?

Cliff-hanger

The drama over Spain’s emergency budget is in danger of distracting attention from what may be an even bigger threat across the Atlantic.
Washington’s ‘fiscal cliff’ – up to $600billion of belt-tightening in a combination of tax rises and spending cuts – is the single biggest near-term threat to the world economy, according to credit agency Fitch.

No one expects a full-scale fiscal squeeze when it comes to the year-end deadline, as that would plunge America into an unnecessary slump and drag the rest of the world down with it.
But even a scaled back contraction will be painful. So is the suspense.

The issue is in limbo ahead of the US elections, meaning that nothing is being done to dispel the doomsday scenarios conjured up by some analysts.
That is eroding business confidence in the US, just as large companies with operations in the eurozone are in a state of suspended animation because of fears over the future of the single currency.

The British economy has shrunk marginally less than initially thought. But with the current account deficit at a record and our two largest trading partners in the wars, the tough times are far from over.

Direct hit

The Direct Line share float, which will include an offer for small investors, harks back to the era of the 1980s privatisations.
Back then, critics of the gas, electricity and telecom share issues argued the family silver was being sold off on the cheap.

The same claim is being made about RBS’s forced disposal of the insurer to meet the conditions of its state aid.
Indications of demand from big institutional investors have been disappointing, because market conditions are so uncertain and the valuation is likely to be less than hoped.

Taxpayers, already facing a £2billion write-off on the sale of Northern Rock to Sir Richard Branson, look set to be out of pocket again.